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Courts may penalise failure to engage with mediation

A Lavelle Partners briefing note on the breakdown in the relationship between directors and shareholders may be amenable to dispute resolution mechanisms such as mediation as an alternative to the traditional route of litigation.

Claim

One common recourse for shareholders in Ireland is to bring a claim on behalf of the company against directors for breaches of fiduciary duties or other unlawful conduct, the lawyers point out.

Similarly, minority shareholders may seek relief through the oppression remedy provided under section 212 of the Companies Act 2014 when their interests are prejudiced or marginalised within the company.

Directors, on the other hand, have a vested interest in preserving corporate harmony and safeguarding the company’s interests amidst shareholder disputes.

They may invoke defences grounded in statutory provisions and common law principles to shield themselves from personal liability and uphold their fiduciary duties.

Mediation

However, litigation can be protracted and resource-intensive, further straining the relationship between parties. Therefore, solicitors often advocate for mediation.

Proactive engagement with shareholders and transparent communication can often pre-emptively mitigate disputes, Lavelle Partners has said.

A recent example was the case of Walls Construction Holdings Limited v the Companies Act 2014 [2023] 21 COS. This case involved a dispute between shareholders over a proposed “growth share scheme”.

The matter came before Mr Justice McDonald in the Commercial List on Monday, 11 March.

The court previously advised the parties to mediate and was very satisfied to hear that it had been a success and resulted in settlement.

The pursuit of alternative dispute resolution can lead to the early resolution of shareholder-director disputes.

Litigating a dispute

The Court of Appeal’s decision in Mascarenhas v Karim & Another [2022] IECA 48 illustrates the disadvantages that come with litigating a shareholder or director dispute. The plaintiff, Tiago Mascarenhas, filed a petition alleging shareholder oppression under section 212 of the Companies Act 2014 concerning Skills & Enterprise Development Academy Limited, which operated an English language college in Dublin.

The disagreement between the parties emerged in 2015, with legal proceedings initiated the following year.

The case concluded in the High Court in 2019, with Justice Costello delivering the judgment in March 2022, seven years after the deterioration of the parties’ relationship.

The financial and time commitments incurred due to such a protracted dispute were undoubtedly substantial.

Impact

In this case, one of the parties declined to mediate on two occasions, and the court refused to make any deduction from the costs of the applicant in conducting the two appeals.

Over time since the introduction of the Mediation Act of 2017, courts will increasingly recognise and penalise the negative impacts of declining mediation in such situations, such as through a costs order, the lawyers state.

Communication

In the case of Healy v Careplus Pharmacy DAC & Ors [2023] 5075, the plaintiff, a 25%  shareholder and director of Navicorp Limited, applied to the High Court for a temporary injunction preventing the defendants from taking any steps to transfer his shares in the company.

The matter came before the High Court in October 2023, which heard that extensive talks had occurred between the parties which resulted in an accommodation in relation to the plaintiff’s injunction application.

Mr Justice Sanfey commended the parties for their efforts in finding a resolution highlighting court recognition of the value of open and transparent communication in director or shareholder disputes.

Conclusion

In conclusion, relationship breakdowns between directors and shareholders in Ireland present formidable challenges for companies, requiring careful navigation and strategic resolution, the lawyers state.

Shareholder or director disputes can be particularly challenging, especially after years of court proceedings, on maintaining a continued relationship.

To that end, alternative dispute resolution is gaining recognition as a viable substitute for litigation, providing swifter, confidential and economically efficient resolution options.